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Robert Meyer, Individually and On Behalf of All v. the St. Joe Company

January 12, 2012


The opinion of the court was delivered by: Richard Smoak United States District Judge


Before me are Defendants' Motion to Dismiss (Doc. 107) and Memorandum in Support (Doc. 108), Plaintiff's Response in Opposition (Doc. 114), and Defendants' Reply (Doc. 115). I previously granted Plaintiff leave to amend the complaint after finding the initial complaint inadequate. (See Doc. 95). That Order is incorporated as further background and reasoning for the conclusions reached here.


This is a purported class action securities fraud case against the St. Joe Company ("St. Joe"), its former chief executive officer and president William Greene ("Mr. Greene"), its former chief financial officer and executive vice president William McCalmont ("Mr. McCalmont"), its former chairman of the board and chief executive officer Peter Rummel ("Mr. Rummell"), and its present chief financial officer and senior vice president (and former chief accounting officer) Janna Connolly ("Ms. Connolly"). Plaintiff alleges Defendants intentionally deceived investors about the value of certain properties located throughout the Florida panhandle in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiff seeks to hold St. Joe, Mr. McCalmont, Mr. Rummell, and Ms. Connolly liable under section 10(b) of the Exchange Act and Rule 10b-5 (Count I), and to impose joint and several liability against them under section 20(a) of the Exchange Act as persons controlling another liable under the Act (Count II). Defendants move to dismiss the First Amended Consolidated Class Action Complaint (Doc. 101) for failure to state a claim.

St. Joe began as a timber and paper company in the 1930s and is now one of the largest real estate development companies in Florida. With approximately 577,000 acres of land, the publically traded company operates its business in four segments: (1) residential real estate; (2) commercial real estate; (3) rural land sales; and (4) forestry (Am. Compl., p. 11). Just prior to and during the class period-- February 19, 2008, through July 1, 2011--the Florida real estate market "crashed." Id. at 13. St. Joe experienced revenue losses, and sales of its homes and homesites "plummeted." Id. at 16. The sales prices for its developments decreased significantly. Id. at 17. In response, St. Joe "effectively ceased its development activity" and reduced its workforce by two-thirds. Id. at 16-17.

Plaintiff alleges that despite these signs, Defendants failed to take appropriate impairment charges*fn1 reflecting the known true value of the development projects, thereby ". . . materially oversta[ting] its asset values and its earnings during the Class Period." Id. at 2. Plaintiff alleges that Defendants' actions did not comply with SEC regulations and Generally Accepted Accounting Principles ("GAAP"). Id. at 35.

On October 13, 2010, these general allegations came to light not in a courtroom but at an investor conference presentation by David Einhorn ("Einhorn"), an investor with a short position in St. Joe stock. Id. at 106. Einhorn's research led him to conclude that "St. Joe had impermissibly failed to take the necessary and required impairment charges to its residential real estate projects in development." Id. at 119. He believed that "it was not possible for the value of the properties to meet or exceed their carrying value." Id. at 108. St. Joe's stock price declined approximately twenty per cent in the two days following this disclosure. Id. at 119-20.

On January 10, 2011, St. Joe announced that the SEC had notified the company that it was conducting an informal inquiry into its impairment practices. On July 1, 2011, St. Joe announced that the SEC issued an order of private investigation related to its previous inquiry into its impairment policies and practices. Id. This announcement purportedly caused a seven percent drop in St. Joe's stock price. Id. at 120.

Lead Plaintiff City of Southfield Fire & Police Retirement System seeks to represent a class of all persons who purchased St. Joe publically traded stock during the class period.


Plaintiff sues Defendants for securities fraud under sections 10(b)*fn2 and 20(a)*fn3 of the Exchange Act and Rule 10b-5*fn4 promulgated thereunder. Plaintiff must establish the following elements: (1) a material misrepresentation or omission by the Defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340, 1352 (11th Cir. 2008) (citing Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)).

Defendants move to dismiss the Consolidated Class Action Complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6). Defendants contend that the Consolidated Class Action Complaint (Doc. 102) fails to adequately plead loss causation, actionable misrepresentation, and scienter. (Doc. 108, p. 6).

Standard of Review

To survive a motion to dismiss, a complaint must contain sufficient facts, which accepted as true, state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 569, 127 S. Ct. 1955, 1974 (2007). Granting a motion to dismiss is appropriate if it is clear that no relief could be granted under any set of facts that could be proven consistent with the allegations of the complaint. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S. Ct. 2229, 2232 (1984). In making this determination, the court must accept all factual allegations in the complaint as true and in the light most favorable to Plaintiff. Christopher v. Harbury, 536 U.S. 403, 406, 122 S. Ct. 2179, 2182 (2003).

Allegations of fraud such as Plaintiff's security fraud claim are subject to the heightened pleading standards set forth in Federal Rule of Civil Procedure 9(b). Instituto de Prevision Militar, 546 F.3d at 1352. Plaintiff must "state with particularity the circumstances constituting the fraud." Fed. R. Civ. P. 9(b). In addition, the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), further raises the pleading standard for securities fraud claims. Plaintiff must specify each statement alleged to have been misleading and the reasons why the statement is misleading. 15 U.S.C. § 78u-4(b)(1)(B). With respect to each statement or omission, Plaintiff must state with particularity facts giving rise to a strong inference that Defendants acted with the required scienter. Id. § 78u-4(b)(2).

Loss Causation

A.Einhorn's Presentation

Plaintiff has the burden of proving that the act or omission of the Defendants "caused the loss for which [P]lainitff seeks to recover damages." Id. § 78u-4(b)(4). Loss causation is not subject to heightened pleading standards but must be supported by a "short and plain statement of the claim showing that the pleader is entitled to relief." See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 346 (2005) (citing Fed. R. Civ. P. 8(a)(2)) (assuming without deciding that loss causation subject to normal pleading standards). Loss causation may not be established by simply alleging that corporate stock was purchased at an artificially inflated price. Dura Pharms., Inc. 544 U.S. at 342. Rather, to sufficiently plead loss causation, Plaintiff must "allege that the subject of the fraudulent statement or omission was the cause of the actual loss suffered, i.e., that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security." Durham v. Whitney Info. Network, Inc., 2009 U.S. Dist. LEXIS 113757, *26-27 (M.D. Fla. 2009) (citing Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 595 F. Supp. 2d 1253, 1278-79 (M.D. Fla. 2009) (quoting Lentell v. Merrill Lynch & Co., 396 F.3d 161, 173 (2d Cir. 2005)). Otherwise, a plaintiff could not distinguish between a decrease in stock value associated with the revelation of the truth from a lower value which may "reflect not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price." Dura Pharms., 544 U.S. at 342-343 (punctuation altered).

Plaintiffs' initial complaint lacked sufficient allegations to support loss causation. (See Doc. 95). To bolster their argument, Plaintiffs have added several additional allegations: 1) they claim the audio recording of Einhorn's presentation demonstrates that impairments should have been taken; 2) they claim a new confidential witness who prepared the presentation, CW5, supports the contention that the presentation involved impairments that were historical in nature; and 3) they claim that the SEC actions serve as separate loss causing events. (Am. Compl., p. 10-14).

Plaintiffs' additional allegations do not cure the problem. Einhorn's presentation still cannot be classified as a corrective disclosure, and the SEC actions fare no better.

A "corrective disclosure" is the event where the alleged misstatements or omissions become public. See e.g., In re DVI, Inc. Secs. Litig., 2011 U.S. App. LEXIS 6302, n.17 (3d Cir. 2011). Information that is already publically available cannot be a corrective disclosure. Teachers' Ret. Sys. v. Hunter, 477 F.3d 162, 187 (4th Cir. 2007) ("The problem with plaintiffs' theory . . . is that these facts had already been disclosed in public filings, so their [subsequent] revelation . . . could not have caused [the company's] stock price to decline."). Likewise, a "negative . . . characterization of previously disclosed facts does not constitute a corrective disclosure of anything but the [author's] opinions." In re Omnicom Group, Inc. Sec. Litig., 597 F.3d 501, 512 (2d Cir. 2010). See also In re Retek Inc. Sec. Litig., 621 F. Supp. 2d 690, 705 (D. Minn. 2009) ("Generally, a re-characterization of previously disclosed news cannot be a corrective disclosure for loss causation purposes.); In re Merrill Lynch & Co. Research Reports Sec. Litig., 568 F. Supp. 2d 349, 363 (S.D.N.Y. 2008) ("The mere negative characterization of existing facts that were never hidden from investors does not permit [plaintiff] to plead loss causation.); In re Teco Energy Sec. Litig., 2006 U.S. Dist. LEXIS 18101, *19-20 (M.D. Fla. 2006) ("The opinions, predictions, and generalized statements offered by Plaintiffs as 'revelations' of the 'truth' regarding [company's] financial status, without more, are not sufficient to establish loss causation."). However, loss causation may be established where an analyst's opinions "identify, reveal, or correct [a] prior misstatement, omission, or improper accounting practice." In re Teco Energy Sec. Litig., 2006 U.S. Dist. LEXIS at *19-20.

Einhorn's presentation "Field of Schemes: If You Build It, They Won't Come" (Doc. 74, Exhibit E), begins with a clear disclaimer. It states that the information contained in the presentation "has been obtained from publically available sources." Id. at 2. In spite of this unambiguous language, Plaintiffs' claim any assertion that the "presentation consists of entirely public information is wrong." (Doc.114, p.6). Rather, they contend that Einhorn's "battery of professional staff and real estate valuation experts" looked at "twenty disparate sources not readily accessible to the ...

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